Using allowance to jump-start budgets

Healthy finances - August 2005

Susan Beacham

When it comes to spending money, kids generally will make a pitch for your wallet before they use their own resources to make a purchase.

It’s interesting that when kids, my own included, absolutely want or need something, the absolute want or need often goes away if they are forced to use their own money.

Makes you wonder just how many “had-to-haves” you got suckered into. Me too.

There is a way to get around this phenomenon. Teach your children how to budget by giving them actual experience. Show your children how to budget for one specific want or need by using their allowance money.

Take a look back in time to my March column, which suggests how you should set up allowance with your child. You’ll find it online at www.chicagoparent.com.

Allowance is given to cover expenses your child wants to be responsible for. Dollar amounts are then assigned to each expense category. Here is where the budgeting opportunity comes in. There is no hard-and-fast rule that mandates that the $15 allocated, say, for “toiletries expenses” MUST be spent completely on toiletries each month. A portion of this money can be “budgeted” to a category for which your child has set a savings goal.

This past Christmas, Allison, my newly minted teen, wanted her own green iPod. We agreed to get it for her as her one big gift instead of a number of smaller gifts. But this was to be the gift from Mom and Dad. One box under the tree. Could she handle it? “Yes,” she said firmly. And she did so beautifully.

Later, when her sister, Amanda, 11, saw how popular and important the iPod was at school (everybody had one), she asked for one herself—in January, after Christmas and not even remotely close to her December birthday. We explained that she had two options: She could wait for next Christmas and strike the same deal her sister made with us or use the money in her savings account to buy the iPod.

Now, does anyone out in reader land want to guess whether or not Amanda has her own iPod yet? No, she does not. Using her money was not an option. Which makes me wonder—just how important a purchase was it to her after all?

Budgeting allowance money for things your child thinks she needs and wants is an excellent way for her to stop and think as she builds toward her goal.

Not to mention the time it gives parents to see just how important the want or need really is to their child.

Budgeting toward a goal presents a cooling-off period for kids, introducing them to a critical life skill—that of delayed gratification. And many kids themselves are surprised at how different they feel about something they absolutely wanted six months ago.

This is, of course, only the first step toward the real budgeting process. This will get their feet wet one goal at a time.

Most kids (and adults) balk at keeping track of all of the money they spend in one week to see where their money is going so they can then begin to budget properly.

Kids who have taken this first step toward budgeting, one goal at a time, will be more interested later on when they are asked to track a week’s worth of expenses.

Success breeds success. The “success” of one goal budgeted for and realized will make our children more inclined to give a week’s worth of tracking a try.

So, as we approach the beginning of the school year, make sure your allowance process is in good shape and includes some budgeting opportunities.

Here’s how to get started:

n Prepare for this discussion by giving your child a copy of last year’s allowance contract. Ask her to indicate any additional expenses she thinks she will need to cover next year that she would like to take personal responsibility for now.

n Re-examine with your child the final categories chosen, and make realistic changes to the money you are handing over for each category.

n Suggest that your child “budget” with her allowance this year. Help her think about what she wants or may need as the year progresses and how she can allocate or move some of that allowance money around to realize those goals.

n Then, as a final step, sit down with each child, one at a time, and work out the new written contract. Remember that a written contract signed by both parent and child is critical to making sure everyone’s memories stay on track. (You can find a copy of the allowance contract we use with our girls at www.MSGen.com in the parents section.)

This annual “renegotiation” of your child’s allowance contract will give you a window into your child’s perspectives on money and how she has matured (or not) in her money attitudes over the summer.

It will also indicate your serious intention to continue to trust your child to manage money in his or her life.

Susan Beacham is the founder and CEO of Money Savvy Generation, a financial education company that provides innovative products and services to help parents and educators teach children the skills of basic personal finance, www.MoneySavvyGeneration.com. E-mail her at Susan@MSGen.com.